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WPP shares tumble as ad giant struggles in North America

Shares in WPP PLC dropped Tuesday as the ad industry’s upheaval took a heavy toll on the world’s largest advertising company, underscoring the challenges facing new chief executive Mark Read.

The advertising giant’s second-quarter results showed a weak performance in North America as its stable of creative agencies struggled. Like-for-like net sales—a figure closely watched by analysts to measure the company’s underlying performance—dropped 3.3% in North America over a three-month period ending June 30. Shares fell as much as 8% in early trading before recovering slightly.

“I’m not happy with the state of our creative agencies in North America,” said Mr. Read. “I think they could be stronger both reputationally and in the quality of the work.”

The advertising world is wrestling with a seismic shift to digital ads from print and TV. Advertisers are tightening their belts on traditional ad campaigns and demanding a wider suite of services, such as website creation, new product development and data science.

Facebook Inc. and Alphabet Inc.’s Google, meanwhile, have grabbed the lion’s share of the digital-advertising market and consulting firms like Accenture are increasingly encroaching on Madison Avenue’s turf.

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The changes have plunged agencies traditionally staffed with copywriters and artists into a race to attract engineers and other tech talent.

Agencies also are cutting costs and allowing clients to work with staff that had been previously siloed.

On Tuesday WPP lowered the guidance for its operating margin for this year, saying it planned to invest more in restructuring the business and incentivizing staff in its faster-growing units.

In an interview after his appointment as CEO on Monday, Mr. Read said he has no plans to sell off or merge flagship creative agencies, many of which are based in the U.S.

The pressure to produce more work for less money is growing. A few years ago agencies could take months to come up with an idea for a 30-second TV commercial. Today, these shops are expected to produce content for clients on a growing number of platforms—from Facebook to Twitter to online video—in real time.

In addition, consumer goods and other industries that once powered the ad business are experiencing disruptions of their own. To cut costs, big clients are changing the structure of how they pay ad agencies.

Ad budgets are shifting to less traditional media and away from so-called “agency of record” deals, in which clients pay a retainer to a single agency who is then responsible for most of its projects. Those deals could last decades, providing agencies with a steady stream of revenue.

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The North American market was weaker in the second quarter, Mr. Read said, in part because U.S. companies have been slower to cut costs than European peers strained by years of anemic economic growth.

North American clients also have been slower than those in the U.K. and some other parts of the world to move their budgets to less traditional media, Mr. Read said. In the U.S., digital ads accounted for 44% of total ad spending last year, according to eMarketer. That percentage was 61% in the U.K. and 60% in China.

“Many clients have been questioning the budgets they’re spending on traditional [ads] over the last 24 months,” Mr. Read said. “It hasn’t happened in one quarter.”

WPP said demand showed signs of recovering in other parts of the world. Like-for-like net sales increased for the first time in more than a year, to 0.7%.

The company now expects like-for-like net sales to grow in line with the first half of the year, when they rose 0.3%. It had previously said the measure would be flat this year.

“The positive thing is that the business has returned to growth,” Mr. Read said.

Mr. Read said a strategic review was under way to address the company’s structure, its underperforming assets—particularly in the U.S.—and how the company should be positioned for the future. One of the things Mr. Read is looking at is whether WPP should continue to own market research unit Kantar, which some analysts have recommended selling. Mr. Read said he would update investors by year-end.

WPP, which houses agencies including J. Walter Thompson, Ogilvy & Mather and Young & Rubicam, said pretax profit rose 8.6% to £846.5 million ($1.1 billion) for the first half, compared with £779.2 million a year earlier. Net profit increased 13% to £672.4 million.

First-half revenue fell 2.1% to £7.49 billion from £7.65 billion a year before due to unfavorable exchange rates, WPP said. The first-half dividend was flat at 22.7 pence.

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